Costly Calls: Directors’ personal liability for oppression

Directors are often called upon to make tough decisions. And sometimes those decisions end poorly or have unintended consequences. In short, bad calls happen.

Generally, bad calls do not trigger personal liability; the law acknowledges that directors have a right to be wrong. While various statutes have chipped away at the traditional immunity afforded to directors, the law continues to extend directors many legal protections from personal liability.

Oppression claims, however, are a significant exception and can pose a serious risk to directors, personally. In broad terms, the oppression remedy is available to a complainant where a corporation acts in a manner that is unfairly prejudicial to the complainant’s interests. This statutory remedy was introduced four decades ago as a major reform to corporate law. Oppression remedy provisions are not drafted narrowly, but rather are designed to be a flexible tool that balances various interests by applying general standards of fairness.

Potential complainants are shareholders, directors, and other “proper persons” such as creditors, whose reasonable expectations have been breached. Most often the alleged oppressive conduct has no valid corporate purpose, and it may have been conducted in bad faith. When oppressive conduct is alleged, the opposing party is usually the corporation, but a director, or other corporate actor, may also be named personally.

When should you, as a director, be concerned about your personal liability? Last summer, the Supreme Court of Canada issued its decision in Wilson v. Alharayeri and set out factors that should be considered by all directors. The decision was awaited with interest because, despite the frequency of oppression claims, the Supreme Court has only ever heard a handful of oppression cases.

In the decision, the Supreme Court reviewed various principles developed at common law and affirmed that personal liability for directors is appropriate if the oppressive conduct is properly attributable to them and if the imposition of personal liability is “fit” in all the circumstances.

The “fitness” assessment involves the analysis of four principles. Three of these principles indicate that the oppression remedy:

1. should go no further than necessary;
2. should only vindicate reasonable expectations of the complainants in their capacity as corporate stakeholders; and
3. should be “fit” in light of other available remedies. For example, the oppression remedy might not be fit when damages for breach of contract could provide an adequate remedy.

The fourth principle provides practical guidance in daily conduct: the oppression remedy request must be a fair way of dealing with the situation. For example, it is fair to impose personal liability on a director when the director

• derived a personal benefit,
• increased control,
• breached a personal duty, or
• misused corporate power,
• or when a remedy against the corporation would unduly prejudice other security holders.

The Supreme Court’s restatement of the law assists in the management of corporate and personal risk. However, since the oppression remedy must respond to unpredictable situations of unfairness, its application remains necessarily imprecise. For this reason, if a situation of potential oppression arises, it is best to make that other call: to pick up the phone and seek legal advice early on.

Carmen M. Baru is an associate with Conway Baxter Wilson LLP, a law firm practicing exclusively civil litigation and advocacy. Conway Baxter Wilson LLP also provides its clients with advice on litigation avoidance strategies. Carmen has a bilingual practice with an emphasis on corporate commercial litigation and on bankruptcy, restructuring and insolvency.